It had been a relatively uneventful quarter for investors until the last week of June, when British voters voted to leave the European Union. Markets around the world plummeted on the surprise vote. The Dow dropped 900 points in the first two trading days after the vote; then regained almost the entire amount over the next three trading days. There is little to do when the markets react like this, and in reality, the Brexit will likely have little impact in the U.S. It is also worth noting that this was a non-binding referendum, so we do not know what the ultimate outcome of the vote will be.
It should come as news to no one that we are in the middle of a presidential election year. As is normally the case, we are asked about the election and its impact on the markets more than any other topic. For the record, presidential election years are normally positive for the markets. Sixteen of the last eighteen election years have produced positive total returns in the stock market. The two down elections years were 2000 and 2008. From a statistical standpoint it is difficult to reach the conclusion that the markets are positive because it is an election year. Likely the two are not connected. We find it reassuring that stock market performance is not tied to presidential elections.
From an economic standpoint, growth of the U.S. economy remains positive, although sluggish, as it has been for the past few years. From an investment viewpoint, this is not a bad thing. Slow and steady economic growth tends to keep asset bubbles from forming like they do from strong growth. New housing starts are at their highest levels in nine years. Employment gains have been nonstop since 2009. Inflation remains very low. As we have stated before, most of the economic problems we are seeing are outside of the U.S. as economic slowdowns in China and Western Europe lead to concerns about our own growth. Long term, it is impossible to be the only growing economy in the world.
It is worth noting that the current bull market is now 87 months old, just the second bull market to reach this age since 1950. The bear market of 2008-2009, during the “Great Recession” came when the U.S. economy contracted 4.2% during an eighteen month period from December 2007 to June 2009. This was the largest economic contraction in the U.S. since 1947 when we started tracking this data. The economy and the markets have come a long way in recovering from this very scary time.
With interest rates at historic lows and the equity markets near all-time highs, we have taken a cautious stance in the near term. While we think the chance of a large drop in the stock market is low, we think the upside is limited from these levels. We will keep you posted as our outlook changes.